Tougher capital, liquidity and other requirements for banks set to come into effect under so-called Basel III rules will have ``unintended consequences’’ for developing nations as the rules will be harder for them to implement and will hurt their growth, a business advisory panel to the G-20 group of nations will warn in a report this weekend.
Basel III rules on liquidity, counterparty risk and trade finance will cut the supply of credit and make it more expensive in developing countries, Peter Sands, chief executive of Standard Chartered Bank and co-chair of the so-called B20 group that prepared the report, told the Financial Times.
“The thrust of the reforms has been about what Europe and the U.S. need to do,’’ Sands said. ``Some of these things are going to have unintended consequences and can be quite dangerous” for countries with less developed financial systems, he told the FT. The B20 taskforce, co-chaired by Guillermo Ortiz, chairman of Mexico’s Grupo Financiero Banorte, is set to release the report Sunday ahead of the Mexico summit of G-20 leaders.
Developing economies will be especially impacted by Basel III’s planned “liquidity coverage ratio” that requires banks to hold assets that would be easy to sell in a market crisis. Under the LCR, banks must hold high-quality corporate and government bonds which are in short supply in countries with shallow capital markets and don’t exist in countries that follow Islamic finance rules.
The B20 taskforce argues that banks in emerging economies are unduly penalized by how Basel III measures counterparty risk. Western banks can hedge against risk by buying credit default swaps on their counterparties. CDS however aren’t available for many developing market companies and banks, the report says.
Research by Spain’s BBVA has found that a 20 percent increase in capital stock and liquidity reserve would cut per capita gross domestic product by 2 percent globally and by 3 percent in emerging economies, the FT said.
The B20 group report also warns that as European banks shed an estimated 2 trillion euros in assets to meet Basel III rules, they will pull out of developing markets, raising the cost of credit, the FT said.
The Basel Committee on Banking Supervision, which drafts the rules, is already looking at changes to the LCR, including alternatives to government bonds, FT quotes Richard Reid, research director of the International Center for Financial Regulation, as saying.
Another report by the Financial Stability Board for next week’s summit of G-20 leaders finds that ``much remains to be completed’’ in implementing tougher rules for the $640 trillion derivatives market, Reuters reported. G-20 had agreed to an end of 2012 deadline for introducing the rules.
"Broadly speaking, the jurisdictions currently with the largest markets in OTC derivatives — the EU, Japan and the U.S. — are the most advanced in structuring their legislative and regulatory frameworks," the FSB report said.
Those countries "expect to have regulatory frameworks in place by end-2012 and practical implementation within their markets is well underway," it said.
G-20 leaders agreed during the 2008-09 financial crisis that the huge off-exchange derivatives market must be made more transparent by recording all trades, which are currently mainly carried out privately between banks.
With most derivatives traded in London and New York, the FSB said several countries had been slow in meeting the G-20 pledges because they are waiting for the EU, United States and Japan to put in place key elements of the plan, such as what types of contracts must be cleared, Reuters reported.
"With international standard setting and policy guidance now largely complete, jurisdictions need to promptly develop and implement legislative and regulatory frameworks," the report said.
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